濱特爾 (PNR) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pentair quarter one 2002 teleconference call.

At this time all participants are in a listen-only mode.

Later, we will have a question-and-answer session, and I'll give you instructions at that time.

Should you require assistance while you are on this call, simply press zero, then star, and an operator will come on to your line to assist you.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, the Chief Financial Officer for Pentair, Mr. David Harrison. Please go ahead.

Thank you. Good morning, and thank you for joining us for Pentair's first quarter of 2002 conference call.

I'm Dave Harrison, Chief Financial Officer, and I'm you're host for this call.

With me this morning is Randy Hogan, President and Chief Executive Officer.

Before we begin this call, I would like to point out that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as, but not limited to, economic and market risks. Also, I'd like to refer you to the risks outlined in our 10-K as of December 31st, 2001.

Forward-looking statements included herein are made as of today, and actual results could differ materially from anticipated results due to the aforementioned risks.

At this time, I'll turn the program over to Randy Hogan.

Thanks for joining us.

As you saw in this morning's news release, we passed several milestones in the first quarter on our journey to better performance and improved value for our shareholders.

Included among the highlights are the following.

Our strong cost position, combined with the effects of improving sales in several businesses, to boost our first quarter earnings per share 13 percent beyond expectations to 43 cents a share.

In our tools business, the first quarter was yet another step in the right direction, with much stronger year-over-year performance in sales, income, asset management and cash flow.

Our free cash flow was a positive $15 million in the first quarter of 2002.

This is our highest first quarter free cash flow in the last 10 years, and is further evidence that our cash flow discipline has become a fact of life in our company.

Pentair's supply chain management and Lean Enterprise initiatives generated more than $9 million of incremental savings during the first quarter.

One of our top line initiatives for 2002 is new product introductions. From past discussions you know we had tremendous success with our 2001 new product lineup, and 2002 is shaping up to be even stronger.

I'll come back to this topic in a few minutes during the operations discussion.

We saw more recovery here into the pump and tools markets during the quarter, a fact that is supported by our backlogs.

In fact, our pump business reported the sales in the first quarter were the strongest they've been in almost two years.

Sales to the core North American industrial and electronic enclosures markets also strengthened over fourth quarter 2001 levels.

Looking back on the quarter, we performed better than originally anticipated. While low volume and fixed cost absorption continued to dampen our performance, we're very encouraged by our progress in the fundamentals of cash flow, receivables and inventories, cost productivity, new products, debt reduction, channel management and market expansion.

Now let's turn to the operating reports, starting with tools.

In the tools business, our manager of cost reduction, pricing discipline, new products, channel management and leadership continues to drive results.

Sales for the quarter gained nine percent over the first quarter of last year, while operating income improved 64 percent on the same comparison.

Sales gains to DeVilbiss came in all product categories, with pressure washers performing exceptionally well.

DeVilbiss generator sales included an incremental benefit due to the January ice storm in the Midwest. These were the first generator storm sales we've experienced in more than two years.

Porter-Cable and Delta shipments were up in North America, but were partially offset by lower international sales.

Tool sales in Europe remain soft, and the general expectation is that improvements won't be apparent there until mid-year at the earliest.

Lowered tools margins versus the fourth quarter of 2001, were driven by three largely temporary factors.

First, product mix issues in both DeVilbiss and Porter-Cable Delta, and actually between DeVilbiss and Porter-Cable Delta.

Two, cost inefficiencies in freight and distribution related to higher than anticipated demand.

And three, higher non-operating costs such as insurance and pension, and of course, higher research and development costs, as well.

Those research and development costs were to support our new product introductions in tools. The group introduced 24 new products in the first quarter.

Included among them were 12 new pressure washers, including units with our advanced, high-pressure radial pump, a pneumatic palm nailers that extends our line of nailers for the construction industry, a pneumatic pin-nailer that broadens the offering for the strategically important woodworking field, and a 19.2-volt professional drill driver.

Also introduced in the first quarter was a Porter-Cable tiger claw, variable-angle reciprocating saw - a real breakthrough product that has already won numerous industry and trade awards.

This tool has taken the saw market by storm, and we're anxious to repeat its success Europe, where we are now rolling out a version of the tiger claw under our FLEX brand.

In conclusion, our first quarter momentum in the tools group seems to be continuing in the second quarter, with high backlog, order rates and shipments.

Our operating profit trends are meeting our expectations, and we're on track to get the tool group margins back in the double-digit range.

In enclosures, first quarter sales were equal to those in the fourth quarter of 2001, and operating income improved 90 basis points in the same sales level.

In fact, operating margins gained 160 basis points, excluding $1 million of non-recurring expense incurred in the first quarter related to our restructuring activities.

Our efforts to size the enclosures business with the market it serves have proceeded well. As mentioned in our fourth quarter conference call, we announced the closure of five manufacturing facilities.

We closed four of these in the first quarter and shifted production to other plants. The remaining plant will be closed by the end of the second quarter.

We also closed

by a further 400 employees during the first quarter.

North American industrial markets in the quarter were off by approximately 20 percent versus first quarter 2001 levels, but were up some five percent compared to the fourth quarter of last year.

There's evidence that suggests that the distribution network is now more

to expand inventories, indicating a pick-up in business.

Automotive quote activity has increased noticeably over the last quarter, and there are already signs of recovery in the North American base electronics market, as well.

For example, the electronics

index, something that we track because it tracks closely with our base electronics business.

That index rebounded to a 13-month high in February.

This has been reflected in improved sales to electronic markets by our Pentair electronics packaging business.

The telecom market, however, continues to be hit hard. Major telecom equipment suppliers continue to deal with overcapacity and lack of demand.

In Europe and Asia, projections for the telecom market are similarly depressed, as infrastructure buildup has tapered off.

The enclosures group continues to pursue several strategies aimed at improving the top line, as well.

Hoffman, for example, continued to expand its distribution network, adding 99 distributors, principally in the commercial market. In addition, 45 new distributors have agreed to carry Hoffman's data product line, and we expect to add another 300 distribution locations in the near future.

We continue to expand our geographic reach, as well, adding 14 new distributors in Mexico.

As you no doubt are aware, the U.S. announced a tariff on imported raw steel during the first quarter.

At this point, the steel markets are extremely volatile, as mills, service centers and customers react to the tariffs.

The majority of our steel purchases are protected by contract from this short-term volatility, and we're working aggressively to mitigate the long-term impact of those tariffs on our business.

In the water technologies group, our pump business rebounded from a tough fourth quarter in 2001, and showed the strongest growth in more than a year, helping to offset a decline in pool and spa equipment sales.

Orders for the group grew more than five percent compared to the same period last year, driven by robust orders in pump from our pool customers late in the quarter and global expansion of large water treatment projects.

These orders give us a strong backlog going into the second quarter.

Total backlog for the group is up six percent compared to the first quarter of 2001.

Operating margins totaled 14 percent, up 260 basis points over the fourth quarter of 2001.

The 80 basis point decline in ROS from the first quarter of 2001 was driven by the lower pool equipment volume, and temporary declines of productivity at our pool business, associated with production rationalization between our factories in California and North Carolina.

These manufacturing rationalization activities are part of our lean initiative, and we expect to see improved productivity in customer service levels in the second quarter.

While pool margins contracted in the quarter, margins in our pump business expanded compared to the first quarter of last year, reflecting increased sales and cost reductions stemming from our lean manufacturing and supply chain management initiatives.

Pump margins in the first quarter were at their highest level in five quarters.

Sales in our water treatment business were down slightly compared to last year's first quarter, as shipments of pressure vessels for large systems continued soft.

We were very pleased that Lowe's named Myer's Water Ace retail division "Vendor of the Year" for its plumbing and electrical division. Myer's, of course, is a unit of the Pentair pump group.

Qualifications to the award include line-item fill rates of 99 percent or higher, high value and high quality products, responsible environmental stewardship, innovative and instructive merchandising, and extraordinary service.

Lowe's has more than 4,000 vendors, of which only 11 were "Vendor of the Year" for 2001.

Water Ace products include residential pumps, tanks and accessories. Water Ace was also named Lowe's "Vendor of the Year" in 1994.

The water technologies group introduced several new products at the Water Quality Association show in the first quarter, including new pressure vessels, new high-flow valves and new reverse osmosis housing.

We also launched our line of residential brine tanks and space-saving cabinets that extend our line of water softener components.

Finally, the backlogs we see in water, combined with our growth and cost initiatives, give us good reason to be enthusiastic about the water technologies group's second quarter performance.

Now let me turn the conference call over to Dave for some additional details on our first quarter.

Thank you, Randy.

As Randy mentioned, our first quarter of free cash flow totaled $15 million, a $68 million improvement over the first quarter of 2001.

This is the first time in at least 10 years that we have generated positive cash flow in the first quarter activity of tools, and more recently water.

This puts us well on our way to achieving the $200 million target we have set for 2002.

Our financial milestones in the first quarter include the following.

We paid down debt another $29 million in the quarter, resulting in a debt to total capital ratio of 40 percent versus 49 percent in the same period last year.

In fact, debt is down $282 million from the first quarter of 2001, and has declined by $505 million from our peak debt position back in April of 2000.

Working capital continues to decline.

Average working capital productivity at the end of the quarter improved 14 percent, or nine days from the prior year.

Receivables were down $61 million or four days.

Inventory was down $88 million, or eight days. And accounts payable was down three days.

Working capital reductions reflect the continued emphasis each segment is putting on cash flow.

Capital expenditures continue to decline, as each of our groups implement lean enterprise.

We spent $7 million in the first quarter versus $12.9 million last year. Our projection for cap ex in the full year of 2002 is roughly $50 million.

Depreciation is starting to reflect the lower capital being spent, at $15 million in the first quarter versus $17 million last year.

Interest costs in the first quarter are now up to $13.7 million, down $4 million from the first quarter last year.

The $13.7 million includes $1.8 million of financing fees that were written off in the first quarter related to the 364-day revolver which we are not using at this time.

SG&A expenses for the quarter declined $10 million - $9 million from adopting Statement of Financial Accounting Standards 142, as we are no longer amortizing goodwill.

G&A costs were more than 20 percent lower in the first quarter of 2002, compared to the first quarter of 2001, as cost reductions and process improvements start to read out.

Selling and service expenses were strategically increased as a percent of sales, to focus on both retail and industrial customer programs.

As usual, our reporting today provides comprehensive financials, including balance sheet and cash flow details in the schedules accompanying this morning's announcements.

In order to aid the understanding of the discontinuance of goodwill amortization for SFAS 142, we have included two additional pages in our news release.

One shows the quarterly breakdown for the total company income statement, and the other does segment breakdown for the same quarters of last year.

Now I'd like to turn the conference back to Randy for wrap-up.

Thanks, Dave. Nice job.

In summary, the first quarter has been a good start to 2002. And we're confident about our second quarter and the balance of the year.

So confident, in fact, that we're raising our EPS expectations for the second quarter to between 75 cents and 80 cents, and raising the upper end of our range for the full-year 2002 estimate to between $2.75 and $2.90 a share.

Of course, these estimates include the effect of the change in goodwill accounting that occurred at the beginning of this year.

I'd now like the AT&T operator to come on the line and please provide our audience with instructions, and we'll move on to the Q&A at this point.

Ladies and gentlemen, if you wish to ask a question, please press the one on your touch-tone phone.

You will hear a tone indicating you've been placed in the queue.

You may remove yourself from queue at any time by depressing the pound key.

And if you're using a speakerphone, please pick up your handset to ensure sound quality.

Our first question comes from the line of Steve Jacobs at U.S. Bank Corporation.

Please go ahead.

Good morning.

Good morning, Steve.

Good morning, Steve.

Congratulations. Great quarter.

Thank you.

By segment, Randy, could you talk about three things?

Price, you know, what pricing is going on each of the three segments.

And then the operating income levels that you attained in these three segments with maybe a focus on the 14 percent in the water.

It went up, you know, like - are they sustainable going forward?

OK.

In terms of price, there's really no movement in any of the three groups up or down.

We didn't see any greater increase in price pressure.

Of course, you know, there is obviously price pressure in all of our businesses. But we didn't see any real opportunity to raise prices, either.

And so, I'd say the pricing environment was flat. And that was particularly true in tools, which is one of the places we've been walking - what we've been talking about.

We were looking to get

to pricing discipline. We do have that pricing discipline, but we - we're flat price-wise first quarter to first quarter.

And in terms of the margins, you know, I talked in the script a little bit - and I'll go business-by-business in the same order we talked about.

The margins in the business, in tools, I think that the margins will continue their pace upward.

We certainly had the quarter-over-quarter improvement, year-over-year. But there was a decline from the fourth quarter to the first quarter.

We fully understand that decline. It was about 200 basis points

And about three-quarters of that, two-thirds to three-quarters of that was mix. And we fully understand it.

So, we're confident we're going to be back on the track of heading toward double-digit with the addition of the growth we saw in the third quarter - the first quarter - which we anticipate in tools will continue. We feel good about where margins are there.

In terms of the - in terms of the water business, the 14 percent margins that you saw in the first quarter, I think they're fully sustainable. And in fact, I expect them to go up.

The reason is, well, seasonally the first quarter is not our best quarter. The second quarter is our best quarter in terms of margins.

But also, the supply management initiatives, I think water is one of our leaders in that arena. They've done a good job.

And with lean - with the activities on lean, for example I mentioned the fact that we had some negative productivity from some of the reconfigurations in our pool business. Essentially, we had duplicate production in both California and North Carolina.

We're eliminating that duplication now that we've identified ways to be more efficient on the distribution side. And that's going to help us both in distribution and in productivity.

So, I think we have a ways to got there.

And then, of course, enclosures, we had a 90 basis point improvement sequentially.

And we really haven't had the restructuring benefits kick in yet. Most of the benefits in the first quarter were really a function of the reduced headcount.

So, I see those margins all heading in the right direction, as well.

Great.

Just a follow-up question on the tool side. Would you expect to see double digits on a quarterly basis yet this year?

I hope so.

OK, great. Thanks a lot.

And the next question comes from the line of Deane Dray at Goldman Sachs. Please go ahead.

Good morning. And first, congratulations to you, Randy, being named Chairman of Pentair.

Thank you, Deane.

You're very welcome.

I'd like to focus both on water and enclosures, if I could. In water, what's your sense about the municipal buying patterns?

And what sort of lagging factor might we be thinking about in terms of authorizations for large municipal spending?

And then, on the enclosures side, how long has Mike Schrock been in that role?

And, when you said you really haven't begun to see the signs or the benefits of the restructuring that Mike is leading there, what sort of upside is there?

And a sense of, you know, any signs of bottoming in Schroff in Europe?

OK. Well, let me start with your second question, and I'll come back to municipal ...

OK.

... on enclosures.

Mike's been there since about November or October.

And the - in the first quarter, we've made great progress in the implementation and execution of the restructuring, as I mentioned.

We targeted to close five plants, and four of them are already shuttered.

We did have additional costs, though, as we moved equipment.

You know, that's not something you charge into restructuring. That's an ongoing benefit.

So therefore you take it to operation.

And so that's the $1 million I talked about - moving equipment.

And the, you know, the inefficiencies of starting up for production in a facility that isn't familiar with it.

I expect that we have seen the bottom in North America on our sales mix - not the bottom in telecom, necessarily, but the bottom in industrial.

We've seen the bottom in the general electronics. And again, to remind everybody what we're talking about there.

We're really talking about the medical equipment business, and the test and measurement business. We saw some strengthening there in North America.

We have not seen the bottom yet in Europe, I think. And it in fact weakened from the fourth quarter to the first quarter.

But that's also the place we've been focusing our - most of our cost reduction efforts right now.

So, I expect - all that together - I expect to see modest improvements in sales going forward for the group, but more than modest improvements in ROS.

OK. And then on water?

On municipal, on the water side, we had a good quarter on shipments in municipal. And in backlogs, still remain strong in that business.

That's largely our Fairbanks Morse business, but also some of our Aurora business and some of our businesses in Ashland.

And while we're cautious, we still haven't seen a real drop-off yet in the quotation rate.

And not being a real prognosticator, I'm not going to predict when that happens. But we're highly sensitized to it.

How far out do you see indications for pricing from municipal buyers?

Well, in terms of quotations on the big municipal projects that we do in Kansas City and Fairbanks Morse, you know, we can see out a good long time, at least six months.

OK.

On the smaller municipals, it's less of a window.

It's a shorter window.

Great.

Thank you.

OK.

And next we go to the line of

at Janney Montgomery Scott. Please go ahead.

Good morning, gentlemen.

Good morning,

.

A quick question on the tools. Could you provide some color on what's driving the demand?

Sure. As we mentioned, our sales are up about nine percent in the first quarter.

The largest single increase in the business for us was in DeVilbiss versus Porter-Cable and Delta.

And the largest single product line for us in terms of the year-over-year growth was pressure washers.

We have a very vital and renewing line in that arena. Our partnership with

has been, I think, beneficial to both of us.

And that's off to a very, very good start this year.

We have good sales of our new products across the board.

But also, very heartening in the first quarter was, we had our first year-over-year improvement in our Delta bench-top and stationary line, which is the product line that we have struggled with the most in terms of sales line over the last 18 months or so.

So, we've really growth in all of them. And I certainly think that sell-through at retail - and in fact, at all channels - is better.

So I'd say it's a combination of some market and the actions we've taken to drive growth.

And then, the fourth quarter you had spoken about consumers trading down at Home Depot.

if you see improvements in that in the first quarter as far as Porter-Cable goes.

I really,

, I really can't give a good view of that.

That comment on the fourth quarter was related to what people were buying for Christmas and Christmas gifts.

In the first quarter, we saw the same kind of seasonal mix we usually see, which is, if you want, a tougher margin mix, which is why we see the sequential decline.

Usually, we also see a sequential decline in sales, which we did not see, because of the strengthening performance of the sales line.

But I would say that, you know, buyers are still cautious.

But I would not say the same thing as I said in the fourth quarter.

OK.

And in enclosures, what has been your total headcount reduction? Is it 400?

Or were you able to do more in the fourth quarter?

Oh, no.

The total headcount - hold on. I'll give you an accurate number.

It's down 23 percent in total over the last year. And so that's about -

that number in there?

Just a second.

Yeah, we're down from over, I'd say it's, well, 1,300 or 1,400 people.

Actually over 1,400 people.

And lastly, what are your expectations for depreciation and whatever the little amortization you may have in the year of 2002?

The expectation for the total year is for $65 million.

OK.

Versus about $63 million for last year.

OK. Thank you very much.

Next we go to Don Zwyer at Lehman Brothers. Please go ahead.

Good morning, Dave, Randy. How are you guys?

Good morning.

Regarding your comment on not seeing the bottom yet in Europe in enclosures, would you say the same for Asia?

And do you need to do any additional restructuring in those markets?

Don, Asia is also weak for us.

But, you know, our biggest market in Asia is Japan.

China is a growing market.

We actually continue to see growth there from a very small base.

But our focus in Asia has largely been serving the semiconductor and the general electronics business, and a little bit of telecom in Japan.

And that has remained weak. It has not been - well, in the first quarter it was about as weak as Europe, year-over-year.

But, it may have bottomed out. I think our expectation is that we saw the bottom in the first quarter.

Europe was continuing to be soft right through the first quarter.

And in terms of whether we need to do additional restructuring, we anticipated that we - well, we anticipated that we needed to take a lot of costs out of Europe.

And we're proceeding to do that in Scotland.

And after that, then it's tuning the number of people.

And right now I think we've got the right plan. But, you know, we're always on top of how much more we need to do, based upon that.

And I have a review of it later this week, so Mike Schrock and I will be taking another look at it.

OK. Thank you.

Next we go to Larry Baker at Legg Mason. Please go ahead.

Good morning. Also congratulations on your quarter.

Thank you, Larry.

Can you just talk about where you are in the supply chain benefits and the - and your other lean management?

Sort of, what percentage of the eventual gains you think you've achieved so far?

Well, in the year we've talked about - I think we've talked about before - getting about $38 million, was our target in savings for the year.

And then we think we've got about $9 million of that in the first quarter. So, I'd say we're a little bit ahead of the game.

In terms of overall, the multi-year activity, I think - the way I think about lean is, we don't know how much money we can get out of it. But it's going to be the key driver to help us drive an overall cost productivity of about five percent.

Our intent is to do what some companies did in 10 years, to do it in three.

And I'd say, on that scale, we're about one year into it.

And we've probably got 80 percent of the benefit yet to go.

In terms of supply management, I'd say that we've been through one full round in enclosures and water.

And we're going to go back and do it again, because, certainly in enclosures, it's a new world they're competing in.

But also, in water, they've had extraordinary success with some of their re-sourcing to lower-cost nations.

And I think that they're going to pick that up to a higher level.

And then in tools, that's been a big driver lately.

They came to the party late on the supply management side.

I'd say again, they all feed into the five percent productivity gain that we expect our businesses to drive every year.

OK. And you talked about achieving, or re-achieving double-digit margins in tools.

Can you do that before the fourth quarter of this year?

I believe this team can do that before the fourth quarter.

I think we're well on our way to that goal.

And, Dave, just for you.

A tax rate of 33 percent for the year?

That - we're looking at somewhere between 32 and 33.

And your first quarter corporate overhead charge was - jumped up a little bit from your run rate. Is that going to be the number, annualize that, or will that decline over the next three quarters?

I think you can probably, for the purpose of forecasting for the balance of the year, use that as sort of a run rate at this point.

We might see a little bit of a decline, but I think right now, it'd be conservative to have that.

OK. Great, thank you.

Next we go to the line of Deane Dray at Goldman Sachs. Please go ahead.

Hi. Just a follow-up question on cap ex.

You thought that $50 million would be the number this year.

Give us a sense of what are the major projects, and some reassurance that there's no starving of any of the businesses for cap ex.

Versus last year when we had a major expansion in our Mexican facility, most of our projects are relatively small. Most of them - a lot of them are tooling for new products.

A lot of it is revamping, supporting lean. And we do have investments going on in our Asian factories.

And we're highly attentive to it. This is a company that was, has always managed capital well.

And we want to drive the top line. And we want to make sure that our businesses have the money they need to do it.

Right now I think we're still reaping the benefits of a leaner approach to running factories, on the capital side. You know, when you look at some of the re-layouts we've done, we're able to get huge amounts of productivity for pennies, in terms of capital.

I think also, if you look at our maintenance capital, which would be somewhere in the range of $25 to $30 million, you can see that we still have a capital end that would not be construed as starving the company.

Terrific.

And then, a quick question. Thoughts on potential acquisitions.

You said water was a priority.

And progress there, an update?

Nothing to talk about at this point. What I said, priorities were - water was the first priority.

Accessories and tools was the second priority. And enclosures has lots of way to grow on their own.

Great. Thank you.

And next we go to the line of Don MacDougall at J.P. Morgan. Please go ahead.

Good morning, guys.

Good morning, Don.

Morning.

A question on tools.

And wondering if could give us your view of whether this is the market, or this is Pentair-specific on the revenue line, the success you've enjoyed in the first quarter, and the momentum you have into the second quarter.

You know, I'd hesitate to give a split. But I believe - I believe it's both what we did, but also, I think the economy is better.

Sell-through is better. We do get sell-through information.

And I would presume that if ours is selling through, other people's are selling through, too.

Where do you think sell-through is in relation to - I mean, is there any inventory build - rebuild - going on out there now>?

Or is this just straight sell-through?

I think, not so much inventory build.

I mean, some product lines, yes, there's inventory build. You know, they tend to build up some inventory, for instance on pressure washers.

And we planned to be selling at a lower rate. And we're doing all we can to ship what we can.

So it seems to me that if - we are not yet in an inventory position to allow people to build inventory. And I'd say, if you look at a lot of retailer shelves, they are - don't have all the inventory they'd like to have.

OK. You mentioned, Randy, a couple of times, new products. I think this year you guys have more than, more than normal on that front.

Can you give us a sense for where sales this year probably end up on a new products as a percentage?

Well, just of the new products we launched last year and the beginning of this year, I think it's about, you know, $150-ish million for tools.

It's a slower ramp-up in water. And I don't have that number off the top of my head.

But, you know, that's just of the products that we're launching here, oh, I'd say over the last six months ...

...

.

OK.

Turning to water, you had cited pool and spa as being below last year. If you could give us a sense for how much that was down.

And what your early read is ...

Yes.

... on the key second quarter here.

Yeah.

Glad to do it. Because I think that's important to understand in the water performance in the first quarter.

You know, our pool business has been the star of the water business here for the last 18 months or so.

And actually, we saw stronger sales in the third and fourth quarter than our short history with the business would have indicated we have.

What we saw in the early part of the first quarter was a draw-down of the inventories that were built in the channel over the third and fourth quarter.

We think that's fully stocked.

In fact, if you look at March performance and you look at our backlog coming out of the first quarter in the pool business, it's up immensely, hugely. It's a very, very strong backlog going into the - into the second quarter.

That, together with, I think, the momentum we've had in the pump business, gives us a good sense that the water business is going to be strong in the second quarter.

And we'll see some recovery of the - of pool's performance in the first quarter, in the second quarter.

OK.

And that second quarter, again is - that's the main event for the pool business, is the second quarter.

OK. And then just a broader question.

You know, we've talked recently about this, and I think you guys have said this before, but just wondering if you still see 12 percent operating margin potential for the overall company in the next couple of years, taking us from I think a little over seven this quarter.

We absolutely see that. We believe that the tool business should be able to run in the 13, 14 percent area.

The water business, you can see what they're performing at already.

And then the enclosures business, I think - I have a lot of confidence in that team.

And I think that even without the book years that we saw of growth, we can still get back to a double-digit level on enclosures.

Great. Thanks for your help. Looks like a great quarter.

Thank you.

And next we go to the line of Steve Jacobs at U.S. Bancorp. Please go ahead.

Two quick questions. One in tools, Randy.

Percent of sales that are now in the retail channel versus the industrial channel?

It's over 50.

Over 50? OK.

And then, over on enclosures, could you give a percentage of sales that are in the industrial?

Yes.

Industrial went up. As we mentioned, the sales are - just a second.

I'll have it here. I know where it is, I just want to see

the right thing.

Industrial is up. Industrial is about 55 percent now, of our sales.

The electronics business is between 15 and 20, so about the same. That's the general electronics business.

OK.

Telecom has dropped to below 15 percent, but above 10.

Data com remains about 10 percent of our business, and the networking business is still a couple points.

Great. Thanks.

And, if there are any further questions, now is the time to press one.

OK, we'll pause a moment more.

It appears that there are no questions, so Mr. Harrison, please continue.

Oh, OK.

Randy, you want to ...

Yeah.

Just thanks for your attention and your interest.

As I mentioned in our annual report, we're focused on three at Pentair this year.

First is we're committed to operational excellence. And I'm encouraged by how our supply management and our lean enterprise initiatives are going to deliver that excellence.

Second, we're committed to growth. And we're getting it positioned where we can get back on the acquisition trail.

But also, importantly, we're creating a mindset to drive organic growth in all three of our businesses. And I think the examples we talked about in Hoffman, and certainly the new products we're focused on in tools and water, are evidence of that.

And third is, we have the benefit - much of the benefits of the turnarounds in tools, and the coming turnaround in enclosures. They had a - and we think that bodes well for our company.

So, thanks for your attention. And we'll see you out there.

Could you come back on the line and give the replay information, please.

And there's no one else in queue.

So, would you like to give the replay information for those who will call in later?

OK.

Actually, we don't show that it's being replayed.

So, just one moment.

OK. Well, we'll do it.

We do, when we have the numbers.

So, the replay will be available at 12:30 today and run through the 19th at 12 p.m.

The U.S. number is 800-475-6701. International playback number is 320-365-3844.

Of course, you have to dial country code one in front of that. And five.

And, with that, we'll see you out there.

Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and for using AT&T executive teleconference.

You may now disconnect.